Bi-Weekly payment programs, are they a good idea?

With bi-weekly payment programs the lender or a 3rd party servicer will typically charge $200-$400 to sign up for the program. They will then automatically draw one half of your total monthly payment every 2 weeks and apply it to your mortgage. The reason that a bi-weekly plan pays down your mortgage quicker than the regular amortization schedule is NOT because you’re making the payment any earlier in the month but because you are making 13 payments per year (there are 52 weeks in a year, 26 bi-weekly periods, and therefore 13 total payments made).

With that said, keep in mind that you can create this very same impact by simply making one extra payment per year or by increasing your monthly mortgage payment by 1/12th of your principal and interest payment. For example, if your monthly principal and interest payment is $1,200 per month then you could add $100 per month (1/12th of $1,200) and have the same impact as the bi-weekly payment program without signing up or paying a fee.

The other consideration to make is how important is it for you to pay down your mortgage? Are their other financial objectives that deserve more attention or are better choices (i.e. retirement savings, investing for kids college education, paying down other debts, building a savings reserve fund, etc.).

Rate Update May 30, 2008

Mortgage rates made a surprise reversal lower this morning on inflation & spending data that came in line with analysts’ expectations. Furthermore, we also think that an announcement out of the Federal government that they are opening an investigation regarding price manipulation in the energy trading markets could be helping mortgage rates. For a more detailed explanation about this reasoning watch today’s you tube video.

We still believe rates will move higher based on technical trading patterns so we are going to maintain a locking bias.

Current Outlook: locking bias

Rate Update May 29, 2008

As we spoke about in Tuesday's 'rate update' investor sentiment seems to transitioning away from concerns about the credit markets and into concerns over inflation. This morning the Commerce Department revised their 1st quarter estimate of GDP by .3%. This positive news for the economy has pushed mortgage-backed bond below the 200-day moving average (blue line) as shown below.


Lower bond prices results in higher interest rates which is what we’re seeing this morning. Mortgage-backed bonds had traded above the 200-day moving average for the past 9 months. The shift today may mark higher interest rates for the foreseeable future.

Current Outlook: locking

Rate Update May 28, 2008

Mortgage rates are modestly higher today than they were yesterday. For clients who did not get their rates locked yesterday we are recommending a floating position in the near-term because of technical trading patterns. If you look at the chart below you can see that bond prices have traded lower since last Wednesday when mortgage rates were about .25% better.

Bond prices have touched the 200-day moving average this morning (the blue line) and we expect this technical level to hold. If it does, bond prices should improve over the next couple days along with interest rates. The risk is that if this technical level does not hold we could see rates get much worse quickly.

Current Outlook: floating bias

Rate Update May 27, 2008

Inflation, inflation, inflation seems to be popping up everywhere. This morning’s monthly consumer confidence report showed that consumer confidence sunk to a 16 year low. Ordinarily bad economic news would help mortgage rates but this morning it’s not the case. Watch today’s you tube video to understand why.

Here are a couple other links that are referenced in today’s you tube video:
*Wikipedia.org- Rational Expectations & inflation
*The Economist- Inflation in emerging economies
*Evan’s blog- Inflation & mortgage rates

Current Outlook: locking

Rate Update May 22, 2008

As oil prices continue to hit new record highs inflation concerns are again weighing on bond prices which is pushing rates higher. In yesterday’s rate update we said:

“However, we remain concerned that continued inflation concerns will drag bond prices below these levels pushing rates higher.”

Unfortunately we are going to shift our outlook to locking. The last few times that mortgage-backed bonds have been pushed below technical layers of support they’ve moved sharply lower over the course of 2-3 trading days. For now we recommend locking in.

Current Outlook: locking

Rate Update May 21, 2008

There is no new economic data scheduled for release today. At 2PM EST the Fed will release the minutes from their April 30th meeting. Sometimes this event can draw some reaction in the financial markets.

In the absence of any significant financial news we will be watching the stock market and technical trading patterns for clues as to the direction of mortgage rates. From a technical perspective mortgage-backed bonds are trading just above multiple layers of support (shown circled on the right side of the graph below). Should bonds bounce higher of these levels rates would surely improve. However, we remain concerned that continued inflation concerns will drag bond prices below these levels pushing rates higher.

Current Outlook: locking bias.

Rate Update May 20, 2008

We mentioned in yesterday’s rate update that stocks may come under selling pressure because of technical trading patterns. Indeed that is happening this morning which is supporting mortgage-backed bond prices. Rates are modestly lower.

The technical trading picture for mortgage-backed bonds is complicated. We are going to recommend a locking stance for individuals who want to play it safe. However, for those who like to gamble, there is a chance that mortgage backed bonds could rally through technical resistance and move lower.

Current Outlook: locking

Inflation pressures

If you've been a consistent reader of 'rate update' or this blog you know that inflation expectations are the primary factor for driving mortgage rates. When expectations of inflation increase it causes rates to rise and vice versa.

There are two articles published this morning which give contradictory forecasts for inflation. It just goes to show that no one knows for sure. Here are links to read for yourself:

-Barron's: Inflationary Risks Increasing

-WSJ.com: Fed's Kohn Sounds Upbeat Note, Says Current Rates Are Appropriate

What is a Home Equity Line of Credit (HELOC)?

A HELOC is a line of credit much like a credit card that is secured against the equity in a home. These are most often originated after a person has owned a home but can also be originated as a part of a purchase transaction.

HELOCʼs have extremely flexible terms and is an excellent financial tool for homeownerʼs with a large equity position in their home. HELOCʼs typically have a 10-year “draw” term. During this period a user may borrower up to the maximum amount of the line of credit and pay it back as many times as they wish.

Due to the flexible nature of the draws HELOCʼs have variable interest rates that are based on the prime index plus a fixed margin. Margins on HELOCʼs can vary from -.50%-3.00%.

The margin is determined by the borrowerʼs credit and equity available in the home. During the draw period borrowers make a minimum of interest-only payments based on the average balance during a given billing period (much like a credit card). The borrower may make additional payments at any time which will go towards reducing the balance owed against the line of credit. In the event that a borrower does not use the HELOC they will not pay any interest. Some HELOCʼs do have an annual service fee charged for the maintenance of the account.

Rate Update May 19, 2008

There is not much in the way of economic data scheduled to be released this week so we’ll be watching technical trading patterns and the stock market for clues on the direction of mortgage rates.

Stocks are currently trading up against technical resistance. Should the stock market reverse from recent highs we could see mortgage rates benefit.

Current Outlook: neutral

Rate Update May 16, 2008

Mortgage rates have improved modestly from yesterday’s levels thanks to the technical support. Bond prices have now regained the levels they reached a week ago today. We are shifting our outlook to a neutral focus after being in a floating stance the past few days.

Current Outlook: neutral

Rate Update May 15, 2008

Mortgage-backed bonds have found technical trading support at the 200-day moving average (blue line in the chart below). After rates increased by .25%-.375% over the previous four trading days it looks like bond prices may rise helping push rates back down.

Watch today’s you tube video for explanation about this chart.

Current Outlook: floating

Rate Update May 14, 2008

Mortgage-rates have now increased by .25%-.375% since we shifted our outlook to locking on Friday, May 9th. The cause of the rate increase has been strength in the stock market and worse than expected inflation data.

However, this morning’s Consumer Price Index (CPI) report may help rates reverse course. The monthly report which is an important gauge on inflation showed that prices at the consumer level of our economy increased less than analysts’ expectations. This may be a sign that the weaker economy is helping curb the inflationary pressure of higher commodity prices.

We are going to shift our outlook to floating with the hopes that this news coupled with positive technical trading patterns will help mortgage rates move back lower.

Current Outlook: floating

Rate Update May 13, 2008

This morning’s monthly retail sales report issued by the commerce department is raising concern over inflation. Watch today’s you tube video to learn what the report showed.

Here is a link to a blog posting explaining the relationship between inflation and mortgage rates.

Current Outlook: locking

Interest rates & Inflation

What causes mortgage rates to go up or down? How come one day 30-year fixed rates are 6.00% and the next they're 6.125%? For many people the vision of a boardroom full of cigar smoking bankers comes to mind when contemplating this question. Or, many believe that the Federal Reserve Bank holds ultimate control with the Federal Funds Rate.

However, the truth of the matter is mortgage rates are entirely determined by the marketplace. Many factors can contribute to the direction of mortgage rates including stock market movements, technical trading patterns of mortgage-backed bonds, geopolitical news but of the most important is inflation.

I have provided a link below to an article that I feel does a good job of explaining the relationship between inflation & interest rates.

The Relationship of Inflation to Interest Rates

As well, here is an except from this article which summarizes the relationship:

When prices increase, your dollar gets to buy less. Over time, prices tend to steadily increase. Hence, your one dollar today is not necessarily equivalent in value to your one dollar tomorrow. A case in point: if you could buy four comic books with your one dollar when you were younger, guess what, Batman? You can't even buy one these days at that price. That is inflation.

So how is this related to interest rates? Investors, try to preserve the value of their money by investing in activities that have yields that are either equivalent or higher than the inflation rate (therefore, when their expectation for inflation increases, they will demand a higher interest rate to lend their money). Let's say that the local interest rate is pegged at 6.5%; the money that you earn, save and invest, should be able to at the very least, match that rate. Why, because at the end of the year, if your money stayed inside the piggy bank, its value would've been eroded by that rate. So if you save 100 dollars at the start of the year, at the end of the year its worth would've been shaved by $6.50 leaving your $100 worth only $93.5.....

So to wrap up, inflation is one of the factors that affect interest rates. When inflation moves up or down, the tendency is to increase or decrease (mortgage) rate(s) as well.

Rate Update May 12, 2008

Mortgage rates rose Friday afternoon in response to inflation concerns surrounding oil prices. The economic calendar looks relatively light this week so we’ll be watching technical trading patterns as well as the stock market to forecast mortgage rates.

In case you missed it last week I posted this blog about how the stock market can impact mortgage rates. It may be timely reading.

Current Outlook: neutral

Rate Update May 9, 2008

Mortgage rates are lower again this morning thanks to the rally in the bond market yesterday afternoon. However, the party may be short lived. Mortgage rates have benefitted from a weak stock market over the past couple days (on a side note, I recently blogged about the relationship between the stock market and mortgage rates which you can read by clicking this link). And although stocks are weak again this morning we expect that energy prices will begin to attract more attention.

Oil has now surpassed $126 per barrel which is likely to boost concerns over inflation. Energy prices impact the entire economy so as oil prices rise producers will try to pass the higher costs through to consumers.
When consumer prices rise mortgage rates will follow. We’ll keep an eye on oil prices but for the near-term we’re going to recommend that our clients lock their rates today.

Current Outlook: locking

How the stock market impacts mortgage rates

Although inflation expectations are the primary factor that influence the direction of mortgage rates on a day-to-day basis the stock market can also have an impact.

To understand how this relationship works it's first important to understand how mortgage rates are determined. Mortgage rates are entirely determined by the price of mortgage-backed bonds (MBS's). MBS's are bonds that are issued by Fannie Mae & Freddie Mac that are backed by the interest paid by mortgage holders. Like the stock market there is an exchange where MBS's are traded.

There is an inverse relationship between the price of MBS's and mortgage rates. When the price of MBS's increase mortgage rates drop and vice versa.

So, to understand how the stock market can influence mortgage rates we have to understand how they impact the price of bonds. Stocks and bonds compete for the same investment dollar. In other words, an investor with money to invest has to make a decision to invest their money in either the stock market or in the bond market (it should be noted that there are other investment options but these two classes are the primary vehicles for investment capital).

For an investor stocks are generally thought to provide higher returns over time but also come with greater volatility. Conversely, bonds tend to have lower returns over time but have less volatility. Because bonds tend to provide low volatility with modest returns the bond market can often act as a "safe-haven" for investors who sell their stock positions.

Therefore, in general, when the stock market goes down it is a sign that investors are selling stocks and shifting their capital into bonds. This boosts bond prices and drives mortgage rates down. Conversely, when the stock market rallies it is a sign that investors are selling bond positions in order to shift capital into the stock market. The greater supply of bonds on the market drives prices lower and pushes mortgage rates higher.

It's important to understand that there are a myriad of factors that impact mortgage rates on a day-to-day basis. Inflation expectations & technical trading patterns are two of the primary factors that we monitor. However, in the absence of new information on these two topics it's not uncommon for mortgage rates to be impacted by the stock market in the aforementioned manner.

Rate Update May 8, 2008

Technical trading patterns are what helped mortgage rates move lower yesterday afternoon. In yesterday’s ‘rate update’ we stated:

“Mortgage-backed bond prices continue to trade just above important technical support. We are watching this level and hope that prices hold. If prices should slip we will shift our outlook to a locking stance.”

Not only did bond prices hold yesterday afternoon but thanks to weakness in the stock market they rallied which pushing mortgage rates lower. Below is a chart showing bond prices hitting the technical support level (shown in circle). The green bar to the right of the circle represents bond prices moving higher off this level. This is a good sign for mortgage rates and so we shift our outlook to floating.

Current Outlook: floating

Rate Update May 7, 2008

A report from the Labor Department showed worker productivity was better than expected in the first quarter. Furthermore, the report showed that labor costs increased less than economists had expected. Watch today’s you tube video to learn how productivity & labor costs can impact mortgage rates.

Despite the positive economic news mortgage rates have reacted to the stock market over the past couple days. When stocks have rallied mortgage rates have been pressured higher which is what we’d expect to see.
Mortgage-backed bond prices continue to trade just above important technical support. We are watching this level and hope that prices hold. If prices should slip we will shift our outlook to a locking stance.

Current Outlook: neutral with floating bias

Rate Update May 6, 2008

A disappointing earnings report out of Fannie Mae is pressuring stocks lower this morning. This weakness is helping to support mortgage-backed bonds prices right at an important technical layer of support. If bonds can rally off this support level it would be a welcome sign for mortgage rates.

Working against interest rates is the ever-increasing price of oil. The price for a barrel of oil has hit $120 and one Goldman Sachs analyst believes it could go as high as $150-$200 over the next 12 months. This would certainly have inflationary impacts on our economy that would likely cause rates to rise.

Current Outlook: neutral with floating bias

Rate Update May 5, 2008

Mortgage-backed bonds are coming under selling pressure this morning threatening the rate gains we made earlier on. Rates began the day .125% better than Friday morning’s rates thanks to weakness in the stock market stemming from the Yahoo/ Microsoft withdrawal.

However, mortgage-backed bonds are now beginning to sell-off as well likely in response to some inflationary imbedded in the monthly Institute for Supply Management (ISM) report.

We like the heavy technical trading support that is just below bond prices. If bond prices can hold we may see rates improve over the next couple weeks. However, if bond prices manage to break through this technical support rates will move higher before they get any better.

Current Outlook: neutral with floating bias

Rate Update May 2, 2008

Every once in a while we get it right and yesterday we certainly called the right play on the monthly jobs report strategy. Although the report showed a 25,000 job contraction in April it was still enough to beat analysts’ expectations which were calling for 75,000.

As a result mortgage rates have moved higher. The second half of our prediction was that mortgage rates over the next 2-3 weeks would rally back pushing rates back to or even lower than they were mid-week.

Current Outlook: locking in near-term, floating long-term

Rate Update May 1, 2008

As you’ve likely heard the Fed did cut short-term interest rates by .25% yesterday. If you read yesterday’s ‘rate update’ you knew this would happen. We also explained that there were two scenarios that might play out in their post-meeting statement. It turns out that one of the two scenarios did take place. Here is a summary:

*If the Fed stresses concern about inflation in their statement over economic recovery it is likely a sign that the Fed is done cutting rates in the near-term. Although concern over inflation is bad for mortgage rates because the Fed is indicating that that they’ll pause it could actually strengthen the US Dollar and help mortgage rates.

Essentially the Fed indicated that they are likely done cutting rates unless something drastic occurs.

Today the Personal Consumption Expenditure Price Index (PCE) was released and showed inflation in line with analyst’s expectations.

Tomorrow the monthly jobs report is due. As a reminder, analysts will be looking at the number of new jobs created in the economy. Typically, when this number beats expectations rates worsen and vice versa. Watch today’s you tube video for our advice on whether or not to lock……

Current Outlook: locking in near-term, floating long-term